Elections take front seat
What, outside of policy announcements, will you watch closely in 2014?
Sophia Whitbread (SW): Elections. There are many key elections happening, most notably in Turkey, Brazil, India and South Africa. While shifts in power can largely be seen as a positive, it’s important to remember reform in emerging markets can be a double-edged sword. There are also a number of events we will need to watch, like the Winter Olympics (February in Sochi, Russia) and World Cup (June, Brazil). Big events on the world stage can create a platform on which protesters or striking workers may try and garner attention.
Caroline Keen (CK): The situation in China will continue to be something we watch closely. Even though China proved fairly resilient in the second half of 2013, it remains a worry for us; its debt-to-GDP ratio of more than 200%1 looms large. The government appears committed to the reform process, which will inevitably slow growth as areas of over-capacity are addressed.
China’s property market remains key. Much of the local government and corporate debt in the country is collateralised by property, so if property prices fall, debt-to-asset ratios rise significantly. Ultimately, we see the high level of leverage in China’s system and the interconnectedness of its economy as a challenge for future growth.
Which election will you be watching with interest?
SW: Brazil (taking place in the second half of the year) stands out; the country has a sizeable civil service and the regulatory system is largely bureaucratic so a change of leadership could affect a number of sectors and the way Brazil does business. However, Brazil may not see any change at all.
The incumbent Dilma Rousseff is expected to win but the race may be closer than previously expected after two opposition candidates joined forces in October 2013.
CK: India has a spring 2014 election slated, although there is a question as to whether it will result in any meaningful change for economic growth in the near term. The current government has not been aggressive in passing or implementing necessary reforms to support growth. As a result, India is suffering from poor infrastructure, high inflation, slowing growth and a weak currency.
The push for change has become a familiar clamour across emerging markets; will this be a story affecting investments in 2014?
SW: Many regimes across the emerging markets perceived to be strong have been weakened by the internet allowing more of the popular voice to be heard. The long-term implication of this trend is that it should help encourage governments to behave more democratically. This ultimately may be good for investors but there is often an adjustment period before such change is embedded.
CK: Political unrest to varying degrees has always been a feature of Asian markets and one of the factors investors must consider. Thailand has had its fair share of political instability in recent history, notably the coup which ousted prime minister Thaksin in September 2006. However, since then the Thai stock market has outperformed world markets by several factors. We do feel the influence of politics on economic performance is growing in significance and could be a key risk, as governments worldwide experiment with unconventional policies.
Foreign investor flows have been a big reason for volatility in these markets, is that likely to continue?
SW: Yes, but on a country-by-country basis. Capital is a very fluid thing but some emerging markets have more shallow capital markets than others and as such flows in either direction can have a more marked effect. Economies with large current account deficits, such as Turkey and Indonesia, are more reliant on foreign investment flows than others.
What is the outlook for dividends for 2014?
SW: Dividend growth in emerging markets has come from earnings growth, not from stretching payout ratios. Like Asia, pay-out ratios across emerging markets have shown remarkable stability and proved commitment to dividends in the 2008-09 crisis period.
CK: We are confident in the stability of dividends in Asia Pacific, with many companies having maintained dividends even during the Asian and global financial crises. The average pay-out ratio for Asia Pacific ex Japan has been around 40% or above for more than a decade.2
Which economies are you most positive on for the year ahead?
SW: Mexico is one to keep an eye on. Mexican private debt as a percentage of GDP is around 20%; the country is in rude financial health and there are no state banks so state intervention in the financial sector is limited. In addition the country benefits from positive demographic trends and widespread reforms involving labour, tax, energy and education sectors. All of this serves to cast the Central American giant in a very favourable light.
CK: Australia continues to be one of our favoured countries and not just because of the high dividends available there. Yes, mining capex is slowing but Australia is more than just commodities and financials. It has a number of worldleading companies across a range of sectors, such as healthcare. We expect growth in the economy will remain reasonable; the level of unemployment is relatively benign; house prices have already risen around 9% since they bottomed-out in May 2012 which should spur confidence and encourage further construction, taking up some of the slack from slower mining investment.
1 Source: CLSA October 2013.
2 Source: MSCI, CLSA and Newton, 30 June 2013.